UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2010
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________to________________
Commission file number 001-16653
EMPIRE PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 73-1238709
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8801 S. Yale, Suite 120, Tulsa, Oklahoma 74137-3575
(Address of principal executive offices)
(918) 488-8068
(Registrant's telephone number, including area code)
Not Applicable
__________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Date File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405
of this chapter)during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
[ ] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
Plan confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of the registrant's common stock, $0.001 par value,
outstanding as of November 15, 2010 was 83,069,235
EMPIRE PETROLEUM CORPORATION
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Balance Sheets at September 30, 2010 (Unaudited) and
December 31, 2009 1
Statements of Operations - Three months and nine months ended
September 30, 2010 and 2009 (Unaudited) 2
Statements of Cash Flows - Nine months ended
September 30, 2010 and 2009 (Unaudited) 3
Notes to Financial Statements 4-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-12
Item 4. Controls and Procedures 12
Part II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 12-13
Item 6. Exhibits 13
Signatures 14
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
EMPIRE PETROLEUM CORPORATION
BALANCE SHEETS
September 30, December 31,
2010 2009
(Unaudited)
ASSETS ____________ ____________
Current assets:
Cash $ 59,825 $ 1,171,565
Accounts receivable
(net of allowance of $3,750
at September 30, 2010 and
December 31, 2009) 55,915 45,915
Prepaid expenses 9,353 0
___________ ____________
Total current assets 125,093 1,217,480
Property & equipment, net of accumulated
depreciation and depletion 2,620,947 920,215
___________ ____________
Total assets $ 2,746,040 $ 2,137,695
___________ ____________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Account payable and accrued
liabilities $ 199,336 $ 10,583
___________ ___________
Total current liabilities 199,336 10,583
Long-term liabilities:
Asset retirement obligation 34,200 34,200
___________ ____________
Total liabilities 233,536 44,783
___________ ____________
Stockholders' equity:
Common stock - $.001 par value,
authorized 100,000,000 shares,
issued and outstanding 83,069,235
and 74,553,361 shares,
respectively 83,069 74,553
Additional paid in capital 13,891,642 13,149,578
Accumulated deficit (11,462,207) (11,131,219)
___________ ___________
Total stockholders' equity 2,512,504 2,092,912
___________ ___________
Total liabilities and stockholders'
equity $ 2,746,040 $ 2,137,695
___________ ___________
See accompanying notes to unaudited financial statements.
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EMPIRE PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
____________________________ ________________________
2010 2009 2010 2009
_____________ _____________ ____________ __________
Revenue:
Petroleum sales $ 0 $ 0 $ 0 $ 9,794
_____________ _____________ ____________ __________
0 0 0 9,794
_____________ _____________ ____________ __________
Costs and expenses:
Production & operating 68,067 57,008 149,892 98,395
General & administrative 56,119 41,153 194,549 159,750
____________ _____________ ____________ __________
124,186 98,161 344,441 258,145
____________ _____________ ____________ __________
Operating loss (124,186) (98,161) (344,441) (248,351)
____________ _____________ ____________ __________
Other income and (expense):
Gain on sale of Cheyenne
River Prospect 0 0 0 102,708
Interest income 547 262 3,453 262
Other income 10,000 0 10,000 0
____________ _____________ ____________ __________
Total other income and
(expense) 10,547 262 13,453 102,970
____________ _____________ ____________ __________
Net income (loss) $ (113,639) $ (97,899) $ (330,988) $ (145,381)
____________ _____________ ____________ __________
Net income (loss) per common
share, basic and
diluted $ (.00) $ (.00) $ (.00) $ (.00)
____________ _____________ ____________ __________
Weighted average number of
common shares outstanding,
basic and diluted 82,931,872 57,193,128 79,614,023 57,193,128
____________ _____________ ____________ ___________
See accompanying notes to unaudited financial statements.
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EMPIRE PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30, September 30,
2010 2009
_________ __________
Cash flows from operating activities:
Net loss $ (330,988) $ (145,381)
Adjustments to reconcile net loss
to net cash used in operating activities:
Value of services contributed by employee 37,500 37,500
Stock option plan expense 28,080 0
Gain on sale of Cheyenne River Prospect 0 (102,708)
Change in operating assets and liabilities:
Accounts receivable (10,000) (27,492)
Prepaid expenses ( 9,353) 9,075
Accounts payable and accrued liabilities 188,753 (11,870)
________ ________
Net cash used in
operating activities ( 96,008) (240,876)
________ ________
Cash flows from investing activities:
Acquisition of lease acres (35,000) (7,191)
Well equipment & drilling costs (1,665,732) 0
Sale of Cheyenne River interests 0 166,525
Purchase of option on South Okie Prospect 0 (25,000)
________ ________
Net cash provided by (used in)investing
activities (1,700,732) 134,334
________ ________
Cash flows from financing activities:
Proceeds from private equity placement 685,000 600,000
________ ________
Net increase (decrease) in cash (1,111,740) 493,458
Cash - Beginning of period 1,171,565 124,122
________ ________
Cash - End of period $ 59,825 $ 617,580
________ ________
See accompanying notes to unaudited financial statements.
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EMPIRE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
The accompanying unaudited financial statements of Empire Petroleum
Corporation ("Empire" or the "Company") have been prepared in accordance
with United States generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by
United States generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation of the Company's financial
position, the results of operations, and the cash flows for the interim
period are included. All adjustments are of a normal, recurring nature.
Operating results for the interim period are not necessarily indicative of
the results that may be expected for the year ending December 31, 2010.
The information contained in this Form 10-Q should be read in
conjunction with the audited financial statements and related notes for
the year ended December 31, 2009 which are contained in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission (the "SEC") on March 30, 2010.
The Company has incurred significant losses in recent years. The
continuation of the Company as a going concern is dependent upon the
ability of the Company to attain future profitable operations. These
financial statements have been prepared on the basis of United States
generally accepted accounting principles applicable to a company with
continuing operations, which assume that the Company will continue in
operation for the foreseeable future and will be able to realize its assets
and discharge its obligations in the normal course of operations. Management
believes the going concern assumption to be appropriate for these financial
statements. If the going concern assumption were not appropriate for these
financial statements, then adjustments might be necessary to adjust the
carrying value of assets and liabilities and reported expenses.
The Company continues to explore and develop its oil and gas interests.
The ultimate recoverability of the Company's investment in its oil and gas
interests is dependent upon the existence and discovery of economically
recoverable oil and gas reserves, confirmation of the Company's interest in
the oil and gas interests, the ability of the Company to obtain necessary
financing to further develop the interests, and the ability of the Company
to attain future profitable production.
In June 2005, the Company completed a private placement of 5,000,000 shares
of its common stock along with warrants to purchase 1,250,000 shares of
its common stock for an aggregate purchase price of $500,000. Subject
to certain restrictions, the warrants may be exercised until November 15,
2010 (extended from the previous date of August 15, 2010) at an exercise
price of $0.25 per share. Proceeds of the private placement were allocated
$67,875 to common stock warrants and $432,125 to common stock and paid-in
capital. These funds were used for general corporate purposes and to pay
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the Company's share of the costs associated with its then 10% interest in
the Gabbs Valley Oil Prospect in Nevada. By subsequent agreement with Cortez
Exploration, LLC (formerly O. F. Duffield) dated May 8, 2006, Empire acquired
an additional 30% interest by agreeing to pay $675,000 in land and related
costs to Cortez and 45% of the drilling and completion costs on a test well to
be known as the Empire Cobble Cuesta 1-12-12-34E, Nye County, Nevada. When
combined with the original 10% working interest in the well and lease block
which was expanded to 75,201 gross acres by the acquisition of an additional
30,917 acres from the U. S. Department of the Interior on June 14, 2006, the
Company's working interest increased to 40%, after paying 55% of the drilling
and completion costs of the Empire Cobble Cuesta 1-12-12N-34E test well. To
fund this increased interest, the Company initiated a private placement of
common stock along with warrants to purchase common stock in June 2006. In
connection with this private placement, the Company issued 7,250,000 shares
of common stock and warrants to purchase 1,812,500 shares of its common stock
at an exercise price of $0.50 per share for an aggregate purchase price of
$1,450,000. In April 2007, the Company raised $1,000,000 through a private
placement of 5,000,000 shares of its common stock along with warrants to
purchase 1,250,000 shares of its common stock which have an exercise price of
$0.50 per share and which expire November 15, 2010. On August 2, 2007, the
Company acquired an additional 17% interest, which increased its interest in
the Gabbs Valley Prospect and leases to 57% (See Note 2). The Company
acquired an additional 9,943.91 acres of leases at a September 2008 lease
sale and 7,680 acres at a September 2009 lease sale bringing the total
acreage in which it has a 57% interest to 92,825 acres. The Company was
encouraged by the data it acquired in connection with the drilling, logging
and testing of the well. Such data, additional studies of such data, the
assistance of geological and engineering consultants and an Advanced
Geochemical Imaging Survey conducted in December 2008 led the Company
to determine that further drilling was warranted.
During the quarter ended March 31, 2010, the Company received stock
subscriptions of $285,000 as a part of its private placement offering, which
concluded on January 26, 2010. The subscribers received 4,071,428 shares of
stock valued at $.07 per share. The shares were issued in January 2010.
Proceeds were utilized for the Company's share of costs to drill a new
well on the Gabbs Valley Prospect.
In July 2010, the Company completed its most recent private placement offering
by issuing 2,500,002 additional shares of common stock, and 1,250,001
additional warrants to purchase shares of common stock at a price of $.50,
which expire in June and July, 2011, as applicable, with an aggregate purchase
price of $225,000. Proceeds from the two most recent private placements will
be utilized for the Company's share of costs to drill a new well on the Gabbs
Valley Prospect (See Note 2). Any remaining funds will be used for general
working capital purposes.
As of September 30, 2010, the Company had $59,825 of cash on hand. In order
to sustain the Company's operations on a long-term basis, the Company
continues to look for merger opportunities and consider public or private
financings. The Company anticipates that with the sale of a portion of its
working interest in October 2010 (See Note 4) it has the funds necessary to
continue its operations through the next three months.
Compensation of Officers and Employees
The Company's only executive officer serves without pay or other compensation.
The fair value of these services is estimated by management and is recognized
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as a capital contribution. For the nine months ended September 30,2010, the
Company recorded $37,500 as a capital contribution by its executive officer.
Fair Value Measurements
The Financial Accounting Standards Board ("FASB") fair value measurement
standards defines fair value, establishes a consistent framework for
measuring fair value and establishes a fair value hierarchy based on the
observability of inputs used to measure fair value. The Company's primary
marketable asset is cash, and it owns no marketable securities.
2. PROPERTY AND EQUIPMENT:
GABBS VALLEY PROSPECT
The Company owns a 57% working interest in oil and gas leases in Nye and
Mineral Counties, Nevada (the "Gabbs Valley Prospect"). Initially,
the Company's working interest was 10% and the Gabbs Valley Prospect
consisted of 44,604 acres, but now consists of 92,825 acres.
As of December 31, 2005, there had been no wells drilled on the Gabbs
Valley Prospect. However, in November 2005, the Company received the
results of a 19-mile 2-D swath seismograph survey conducted on the
prospect and, based on the results of the survey, the Company and its
partners determined that a test well should be drilled on the prospect.
The Company also elected to increase its interest in the prospect by
taking a farm-in from Cortez Exploration LLC (formerly O. F. Duffield).
Empire agreed to pay Cortez $675,000 in lease costs plus 45% of the costs
associated with the drilling of a test well to earn an additional 30%
working interest which made its total working interest 40%. The lease block
of 44,604 acres was increased to 75,521 acres by the acquisition of an
additional 30,917 acres from the Department of the Interior (Bureau of
Land Management) in June 2006. The block was reduced to 75,201 acres due
to the expiration of one 320-acre lease during 2007. In 2008 and 2009, the
Company acquired leases on 17,624 additional acres through federal lease
sales, bringing its total to 92,825 acres.
After reaching 5,195 feet in connection with drilling this first test well,
the Company and its partners elected to suspend operations on the well,
release the drilling rig, and associated equipment and personnel to evaluate
the drilling and logging data. After the study was completed, Empire and its
partners decided to conduct a thorough testing program on the well. The
Company re-entered the well on April 17, 2007 and conducted a series of drill
stem tests and recovered only drilling mud. It was then determined after
considerable study that the formation is likely very sensitive to mud and
water used in drilling which may have caused clays in the formation to swell
preventing any oil that might be present to flow into the wellbore. During
2007, the Company increased its interest in the prospect leases to 57% when
one of the joint participants elected to surrender its 30% share of the
prospect. The Company and its joint owners assumed liabilities of
approximately $68,000 to acquire this interest.
Other than a 5,000 barrel-per-day refinery located approximately 200
miles from the Gabbs Valley Prospect, there are no pipelines or service
networks located near the prospect. A small refinery located about 115 miles
from the prospect has now shut down.
In 2008, the Company and its partners engaged W. L. Gore and Associates to
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carryout an Amplified Geochemical Imaging Survey which covered approximately
sixteen square miles. The survey was concentrated along the apex of the large
Cobble Cuesta structure which included the areas around the Empire Cobble
Cuesta 1-12 exploratory test and the other test well drilled in the immediate
area. Both of these tests encountered oil shows and the geochemical survey
indicated potential hydrocarbons beyond the two well bores. A new
Federal drilling unit has been formed and approved by the Bureau of Land
Management. This unit is known as the Paradise Drilling Unit and contains
40,073 acres out of our total lease block now containing 92,825 acres.
In July 2010, the Company entered into a farm-in agreement with its joint
lease holders holding a 41% working interest in the 40,073 acre Paradise
Unit. On July 19, 2010, the Company commenced drilling a test well in the
Paradise Unit on the Gabbs Valley Prospect in Nevada.
Subsequent to September 30, 2010, the Company drilled a test well, the Paradise
Unit 2-12, to a depth of 4,250 feet before drilling problems caused the Company
to cease drilling. The Company tested the well between 3,700 feet and 3,782
feet where oil shows had been found. The Company recovered small amounts of
oil containing paraffin, which may have been restricting the oil flow.
However, swab tests failed to increase the oil flow and the Company has
suspended operations on the well pending an engineering analysis of whether
chemical additives might increase the flow of oil.
SOUTH OKIE PROSPECT
On August 4, 2009, the Company purchased, for $25,000 and payment of lease
rentals of $4,680, a nine-month option to purchase 2,630 net acres of oil and
gas leases known as the South Okie Prospect in Natrona County, Wyoming.
The option allowed the Company to purchase the leasehold interests for $35,000
which was exercised in 2010. The Tensleep Sand at depths from 3,300 feet
to 4,500 feet is the primary target. The Tensleep is an excellent oil
reservoir with the potential of 700 barrels of oil per acre foot recovery.
The Company has completed its geological and seismic studies and subsequent
to the completion of these studies it has carried out a thorough engineering
study. This later study focused on the most promising locations and potential
reserves. The Company has elected to concentrate on drilling its Nevada
prospect before deciding on a course of action on this prospect.
3. EQUITY
On June 14, 2010, the Company extended all of its outstanding warrants to
November 15, 2010. Fair values of the extended warrants were estimated at
the date of extension using the Black-Scholes Option Valuation Model with
the following weighted average assumptions: risk free interest rate of
..15%, volatility factor of the expected market price of the Company's
common stock of 154%, no dividend yield, and a weighted average expected
life of the warrants of 5 months. As a result of the extension, the
outstanding warrants were revalued at $131,125, which had no income statement
effect.
On March 17, 2010, John C. Kinard, a member of the Company's Board of
Directors, was issued options to purchase 70,000 shares of the Company's
common stock under the 2006 Stock Option Plan at a strike price of $0.25 per
share. The options immediately vested and expire after ten years. The
Company recorded an expense of $16,380 for the options. Fair values
were estimated at the date of grant of the options, using the Black-Scholes
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Option Valuation Model with the following weighted average assumptions:
risk free interest rate of 3.65%, volatility factor of the expected market
price of the Company's common stock of 162%, no dividend yield, and a weighted
average expected life of the options of 5 years. For the purpose of
determining the expected life of the options, the Company utilizes the
Simplified Method as defined in Staff Accounting Bulletin No. 107 issued by
the SEC.
On September 9, 2010, Alfred H. Pekarek, a consulting geologist to the Company
was issued options to purchase 50,000 shares of the Company's common stock
under the 2006 Stock Option Plan at a strike price of $0.26 per share. The
options immediately vested and expire after ten (10) years. The Company
recorded an expense of $11,700 for the options. Fair values were estimated at
the date of grant of the options, using the Black-Scholes Option valuation
model with the following weighted average assumptions: risk free interest
rate of 2.77% volatility factor of the expected market price of the Company's
common stock of 142%, no dividend yield, and a weighted average expected life
of the options of 5 years. For the purpose of determining the expected life
of the options, the Company utilizes the Simplified Method as defined in Staff
Accounting Bulletin No. 107 issued by the SEC.
Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period. The computation of Diluted EPS does not assume conversion,
exercise or contingent exercise of securities that would have an anti-dilutive
effect on losses. As a result, if there is a loss from continuing operations,
Diluted EPS is computed in the same manner as Basic EPS. At September 30,
2010, the Company had 1,095,000 and 6,534,726 options and warrants outstanding,
respectively, that were not included in the calculation of earnings per share
for the periods then ended. Such financial instruments may become dilutive
and would then need to be included in future calculations of Diluted EPS. At
September 30, 2010, the outstanding options and warrants were considered
anti-dilutive since the strike prices were below the market price and since
the Company has incurred losses year to date.
In January 2010, the Company received stock subscriptions of $285,000 as a
part of its then ongoing private placement offering, which concluded on
January 26, 2010. The subscribers received 4,071,428 shares of stock valued
at $.07 per share. Subsequent to this private placement, the Company
determined that it needed to enter into the farm-in agreement (See Note 4) and
raise additional funds in order to successfully drill a new test well on the
Gabbs Valley Prospect.
In June 2010, the Company issued 1,944,444 shares of its common stock and
warrants to purchase 972,225 shares of common stock (with an exercise
price of $0.50 per share and which expire in June 2011), with an aggregate
purchase price of $175,000 as a part of its most recent private placement
offering. Proceeds of the private placement were allocated $43,750 to common
stock warrants and $131,250 to common stock and paid in capital. The value of
the warrants was estimated using the Black-Scholes Valuation Model with the
following weighted average assumptions: risk free interest rate of .30%, no
dividend yield, volatility factor of the expected market price of the Company's
common stock of 155%, and a weighted average expected life of the warrants of
one year.
In July 2010, the Company completed its most recent private placement offering
by issuing 2,500,002 additional shares of common stock, and 1,250,001
additional warrants to purchase shares of common stock at a price of $.50,
which expire in June and July, 2011, as applicable, with an aggregate purchase
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price of $225,000. Proceeds from the two most recent private placements will
be utilized for the Company's share of costs to drill a new well on the Gabbs
Valley Prospect (See Note 2). Any remaining funds will be used for general
working capital purposes.
Proceeds of the June-July 2010 private placement were allocated $77,500 to
common stock warrants and $322,500 to common stock and paid in capital. The
value of the warrants was estimated using the Black-Scholes Valuation Model
with the following weighted average assumptions: risk free interest rate of
..30%, no dividend yield, volatility factor of the expected market price of the
Company's common stock of 157%, and a weighted average expected life of the
warrants of one year.
4. SUBSEQUENT EVENTS
In October 2010 the Company sold 7% of its working interest in the Gabbs
Valley Prospect leases for $700,000. The sale grants the purchasers a working
interest in the Paradise Unit 2-12 well and grants an option to participate in
the farmin of the non-unit leases.
In October and November, 2010 the Company continued drilling the Paradise Unit
2-12 well to a depth of 4,250 feet before drilling problems caused the Company
to cease drilling. The Company tested the well between 3,700 and 3,782 feet
where oil shows had been found. The Company recovered small amounts of oil
containing paraffin, which may have been restricting the oil flow. However,
swab tests failed to increase the oil flow and the Company has suspended
operations on the well pending an engineering analysis of whether chemical
additives might increase the flow of oil. See Note 2.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) periodically issues new
accounting standards in a continuing effort to improve standards of financial
accounting and reporting. The Company has reviewed the recently issued
pronouncements and concluded that the following new accounting standards are
applicable:
In January 2010, the FASB issued Accounting Standards Update No. 2010-06,
"Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures
about Fair Value Measurements." This Update requires new disclosures regarding
the amount of transfers in or out of Levels 1 and 2 along with the reason for
such transfers and also requires a greater level of disaggregation when
disclosing valuation techniques and inputs used in estimating Level 2 and
Level 3 fair value measurements. This Update also includes conforming
amendments to the guidance on employers' disclosures about postretirement
benefit plan assets. The disclosures are required for reporting beginning
in the first quarter 2010. Also, beginning with the first quarter 2011, the
standard requires additional categorization of items included in the
rollforward of activity for Level 3 inputs on a gross basis. Adoption of this
standard will not have a material effect on the Company's financial statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL TO ALL PERIODS
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The Company's primary business is the exploration and development of oil and
gas interests. The Company has incurred significant losses from operations,
and there is no assurance that it will achieve profitability or obtain the
funds necessary to finance its operations. Sales revenue in 2009 was
attributable to the production of oil from the Company's Timber Draw #1-AH
and the Hooligan Draw #1-AH wells located in the Eastern Powder River Basin
in the State of Wyoming, otherwise known as the Cheyenne River Prospect,
which was sold in 2009. For all periods presented, the Company's effective
tax rate is 0%. The Company has generated net operating losses since
inception, which would normally reflect a tax benefit in the statement
of operations and a deferred asset on the balance sheet. However, because
of the current uncertainty as to the Company's ability to achieve
profitability, a valuation reserve has been established that offsets the
amount of any tax benefit available for each period presented in the
statements of operations.
THREE MONTH PERIOD ENDED SEPTEMBER 30, 2010, COMPARED TO THREE MONTH PERIOD
ENDED SEPTEMBER 30, 2009.
Production and operating expenses increased $11,059 to $68,067 for the three
months ended September 30, 2010, from $57,008 for the same period in 2009.
The increase was primarily due to Empire's higher share of Gabbs Valley lease
rentals due to its increased percentage.
General and administrative expenses increased by $14,966 to $56,119 for the
three months ended September 30, 2010, from $41,153 for the same period in
2009. The increase was primarily due to increased options granted and legal
and travel costs associated with the Company's private placement offering.
Other income increased to $10,000 for the three months ended September 30,
2010 from $0 for the same period in 2009. The increase was due to the sale of
well log data to a third party in September 2010.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2010, COMPARED TO NINE MONTH PERIOD
ENDED SEPTEMBER 30, 2009.
For the nine months ended September 30, 2010, sales revenue decreased $9,794
to $0 compared to $9,794 for the same period during 2009. As of September 30,
2009 the Timber Draw #1-AH and the Hooligan Draw #1-AH wells had been sold.
Production and operating expenses increased $51,497 to $149,892 for the
nine months ended September 30, 2010, from $98,395 for the same period in
2009. The increase was primarily due to Empire's higher share of Gabbs Valley
lease rentals due to its increased percentage.
General and administrative expenses increased by $34,799 to $194,549 for the
nine months ended September 30, 2010, from $159,750 for the same period in
2009. The increase was primarily due to options granted and costs associated
with the issuance of stock options in 2010.
Other income increased to $10,000 for the nine months ended September 30, 2010
from $0 for the same period in 2009. The increase was due to the sale of well
log data to a third party in September 2010.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) periodically issues new
accounting standards in a continuing effort to improve standards of financial
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accounting and reporting. The Company has reviewed the recently issued
pronouncements and concluded that the following new accounting standards are
applicable:
In January 2010, the FASB issued Accounting Standards Update No. 2010-06,
"Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures
about Fair Value Measurements." This Update requires new disclosures regarding
the amount of transfers in or out of Levels 1 and 2 along with the reason for
such transfers and also requires a greater level of disaggregation when
disclosing valuation techniques and inputs used in estimating Level 2 and
Level 3 fair value measurements. This Update also includes conforming
amendments to the guidance on employers' disclosures about postretirement
benefit plan assets. The disclosures are required for reporting beginning
in the first quarter 2010. Also, beginning with the first quarter 2011, the
standard requires additional categorization of items included in the
rollforward of activity for Level 3 inputs on a gross basis. Adoption of this
standard will not have a material effect on the Company's financial statements.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As of September 30, 2010, the Company had $59,825 of cash on hand. The
Company believes that its cash on hand along with proceeds from the sale of
a portion of its working interest in the Paradise Unit, will allow it to
finance its operations for the next six months. In order to sustain the
Company's operations on a long-term basis, the Company intends to continue to
look for merger opportunities and consider public or private financings. The
Company plans to undertake further exploration of the Gabbs Valley Prospect
in 2010.
OUTLOOK
As stated elsewhere in this Form 10-Q, on May 1, 2007, after further
testing of the Company's only well in the Gabbs Valley Prospect, the
Company decided to partially plug and abandon the well since no hydrocarbons
were recovered. However, the Company was encouraged by the data it acquired
in connection with the drilling, logging and testing of the well. Such data,
additional studies of such data, the assistance of geological and
engineering consultants and an Advanced Geochemical Imaging Survey conducted
in December 2008 led the Company to determine that further drilling is
warranted. It is possible that excessive mud exposure in the hole for over
five months seriously impeded the process of recovering hydrocarbons. It was
determined that a new test well should be drilled using a different
method of drilling.
The Company drilled the Paradise Unit 2-12 well to a depth of 4,250 feet before
drilling problems caused the Company to cease drilling. The Company recovered
small amounts of oil containing paraffin, which may have been restricting the
oil flow. However, swab tests failed to increase the oil flow and the Company
has suspended operations on the well pending an engineering analysis of
whether chemical additives might increase the flow of oil Based on the
engineering analysis the Company will determine its next actions related to the
well.
MATERIAL RISKS
The Company has incurred significant losses from operations and there is no
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assurance that it will achieve profitability or obtain the funds necessary to
finance continued operations. For other material risks, see the Company's
Form 10-K for the period ended December 31, 2009, which was filed on March
30, 2010.
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q, including this section, includes certain
statements that may be deemed "forward-looking statements" within the meaning
of federal securities laws. All statements, other than statements of
historical facts, that address activities, events or developments that the
Company expects, believes or anticipates will or may occur in the future,
including future sources of financing and other possible business
developments, are forward-looking statements. Such statements are subject
to a number of assumptions, risks and uncertainties and could be affected by
a number of different factors, including the Company's failure to secure short
and long-term financing necessary to sustain and grow its operations, increased
competition, changes in the markets in which the Company participates and the
technology utilized by the Company and new legislation regarding environmental
matters. These risks and other risks that could affect the Company's business
are more fully described in reports it files with the SEC, including its Form
10-K for the fiscal year ended December 31, 2009. Actual results may vary
materially from the forward-looking statements.
The Company undertakes no duty to update any of the forward-looking statements
in this Form 10-Q.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an
evaluation under the supervision of the Company's Chief Executive Officer (and
principal financial officer) of the effectiveness of the design and operation
of the Company's disclosure controls and procedures pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, the
Company's Chief Executive Officer (and principal financial officer) has
concluded that the disclosure controls and procedures as of the end of the
period covered by this report are effective. During the period covered by this
report, there was no change in the Company's internal controls over financial
reporting that has materially affected or that is reasonably likely to
materially affect the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2010, the Company received
subscriptions for 1,944,444 shares of its common stock, par value $0.001 per
share, through a private placement. During such period, it also issued
warrants to purchase 972,225 shares of its common stock in connection with the
private placement (with an exercise price of $0.50 per share and which expire
in June, 2011). The aggregate purchase price for such shares and warrants was
$175,000. The private placement concluded on July 13, 2010. In total in the
private placement (including events prior to July 1,2010), the Company received
subscriptions for 4,444,446 shares of its common stock, par value $0.001 per
share, and warrants to purchase 2,222,226 shares of its common stock (with an
exercise price of $0.50 per share and which expire in June and July, 2011, as
applicable), with an aggregate purchase price of $400,000. The material terms
and conditions applicable to the purchase and sale of the securities in the
private placement are set forth in the form of the securities purchase
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agreement and the common warrant certificate incorporated herein by reference.
The funds raised in the private placement will be used for the purposes
discussed in Note 3 to the financial statements.
The offers and sales related to the shares described above were not registered
under the Securities Act of 1933, as amended, in reliance upon the exemption
from the registration requirements of that act provided by Section 4 (2)
thereof and Regulation D promulgated by the SEC thereunder. Each of the
investors in the private placement was a sophisticated accredited investor with
the experience and expertise to evaluate the merits and risks of an investment
in the Company's stock and the financial means to bear the risks of such an
investment. In addition, each investor was provided access to all of the
material information regarding the Company that such investor would have
received if the offer and sale of the securities had been registered.
On September 9, 2010, Alfred H. Pekarek was issued options to purchase 50,000
shares of the Company's common stock under the 2006 Stock Option Plan at a
strike price of $0.26 per share. The options immediately vested and expire
after ten years. The options were not registered under the Securities Act of
1933, as amended, and were issued in exchange for consulting engineering
services.
In relation to the options issued to Alfred H. Pekarek, the Company relied on
the exemption set forth in Section 4(2) of the Securities Act of 1933, as
amended, in connection with the issuance of the options described above.
Alfred H. Pekarek is a sophisticated person, there was no underwriting in
connection with the issuance of these options and no commissions were paid to
any party upon such issuance. Additional information about the issuance of
these options can be found in Note 3 in the Notes to Financial Statements.
Item 6. Exhibits
a) Exhibits
10.1 Form of securities purchase agreement entered into between
Empire Petroleum Corporation and certain accredited investors
in connection with the June-July 2010 private placement
(Incorporated herein by reference to Exhibit 10.1 to the
Company's Form 10-Q for the period ended June 30, 2010,
which was filed on August 13, 2010).
10.2 Form of common share warrant certificate issued by Empire
Petroleum Corporation in favor of certain accredited
investors in connection with the June-July 2010 private
placement (Incorporated herein by reference to Exhibit 10.2
to the Company's Form 10-Q for the period ended June 30,
2010, which was filed on August 13, 2010).
31 Certification of Chief Executive Officer (and principal
financial officer) pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as
amended, and Item 601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(submitted herewith).
32 Certification of Chief Executive Officer (and principal
financial officer) pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (submitted herewith).
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EMPIRE PETROLEUM CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMPIRE PETROLEUM CORPORATION
Date: November 15, 2010 By: /s/ Albert E. Whitehead
___________________
Albert E. Whitehead
Chairman, Chief Executive
Officer and Principal
Financial Officer
EXHIBIT INDEX
NO. DESCRIPTION
10.1 Form of securities purchase agreement entered into between
Empire Petroleum Corporation and certain accredited investors
in connection with the June-July 2010 private placement
(Incorporated herein by reference to Exhibit 10.1 to the
Company's Form 10-Q for the period ended June 30, 2010,
which was filed on August 13, 2010).
10.2 Form of common share warrant certificate issued by Empire
Petroleum Corporation in favor of certain accredited
investors in connection with the June-July 2010 private
placement (Incorporated herein by reference to Exhibit 10.2
to the Company's Form 10-Q for the period ended June 30,
2010, which was filed on August 13, 2010).
31 Certification of Chief Executive Officer (and principal
financial officer) pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as
amended, and Item 601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(submitted herewith).
32 Certification of Chief Executive Officer (and principal
financial officer) pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (submitted herewith).
EXHIBIT 31
CERTIFICATION
I, Albert E. Whitehead, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Empire
Petroleum Corporation;
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2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
November 15, 2010 /s/ Albert E. Whitehead
Albert E. Whitehead,
Chief Executive Officer and
Principal Financial Officer
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Empire Petroleum Corporation
(the "Company") on Form 10-Q for the period ending September 30, 2010 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Albert E. Whitehead, Chief Executive Officer (and principal
financial officer) of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
November 15, 2010 /s/ Albert E. Whitehead
Albert E. Whitehead
Chief Executive Officer and
Principal Financial Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange
Commission as an exhibit to the Report and shall not be considered filed as
part of the Report.